Published January 22, 2009

Tanjong shares up despite downturn

Its stock is trading at just eight times 2010 earnings

By S JAYASANKARAN
IN KUALA LUMPUR

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Amid a sea of red on the Kuala Lumpur stock exchange, power and gaming company Tanjong plc bucked the trend moving up almost one per cent to close at RM13.60 (S$5.65). Indeed, the stock has climbed by nearly 30 per cent since October last year.

Mr Krishnan: Has long mulled the prospect of moving out altogether from the gaming business

Analysts like Tanjong - controlled by tycoon T Ananda Krishnan - for its good management, strong cash flows and high dividend yield, estimated to gross 8 per cent this year at a time when bank deposit rates are around 3.2 per cent. Moreover, analysts estimate that the stock is trading at just eight times 2010 earnings.

Tanjong grew by acquiring overseas power assets because it faced intense competition in a near-saturated home market. And it could get worse. Malaysia has excess capacity and is currently running at a reserve margin of 40 per cent which limits earnings growth for independent power producers such as Tanjong.

The economic slowdown has also sharply cut demand so new plants are unlikely in the near future. It has made overseas expansion absolutely crucial for renewed growth.

Since 2003, Tanjong has more than doubled its generation capacity by buying power plants in Egypt, the Middle East, Bangladesh and Sri Lanka. It also ventured into resort development by building a tropical amusement park in Germany, an acquisition that came with 500 hectares of freehold land. The park is still loss-making but is expected to turn around by 2010.

New growth is likely to come from power generation - it already constitutes almost 80 per cent of earnings - and property. The remainder (20-odd per cent) of the company's earnings come from gaming: The company is one of Malaysia's three number forecast operators and runs the only racing totalisator in the country.

Whether the gaming unit will remain is anyone's guess. Mr Krishnan has long mulled the prospect of moving out altogether from the gaming business. If he finally does - and most of his associates believe he eventually will - it could involve more than Tanjong. His privately held flagship company Usaha Tegas runs the sweepstakes - a sort of lottery - and that would also have to go if the tycoon wants to move out of gaming.

One problem, analysts said, would be the price, at a time of looming economic gloom. Another would be who the potential buyer is. A foreign party can certainly be ruled out and there may not be many local businessman with the financial fortitude to acquire such a cash generating asset.

Even so, a Tanjong without gaming would shave around RM800 million from the company's yearly sales of RM4 billion. But it would leave the company with a huge cash hoard for further acquisitions overseas.